More Worker Quits? It’s a Good Thing.

The Bureau of Labor Statistics (BLS) recently announced that worker “quits” were the highest it had measured. The press is even calling it “The Great Resignation.” You may not think that this is good news. After all, the image we have in our minds of a worker quitting involves flashing a certain finger while walking out the door. But, in a world where workers’ bargaining power has been vanishing, this trend is actually good news.

Why are Worker Quits Good?

According to the BLS, workers can leave jobs for several reasons. Two such reasons are layoffs or discharges. “Layoffs” are a formal suspension from pay status expected to last seven or more days. Layoffs are bad. “Discharges” occur when a worker is let go of more permanently. Discharges may occur because the worker is being fired with cause, or simply because the employee was short-term or seasonal. Discharges are also bad.

“Quits” on the other hand, are defined as voluntary exits. Therefore, many quits are simply the first step in a voluntary job transition. As an economist, I assume any voluntary change happens for one of two reasons. The first is that the worker expects to make more money at their next job. In a famous early study by economists Robert Topel and Michael Ward, a whopping one third of the wage growth of men in the first ten years of their careers came from job-to-job moves.

The second reason for a voluntary job change is that the worker dislikes their current job, and will be happier at their next one. For example, my co-author Steve Sass and I looked at the retirement patterns of older workers who switched jobs. We found that those who switched jobs voluntarily in their 50s were significantly more likely to keep working until at least age 65. Side lesson: if you hate your job less, you can work longer.

Either way, voluntary worker quits are a good thing.

Recent Trends in Quits

The graph below was produced from Federal Reserve Economic Data (FRED). It shows the quit rate — i.e., he number of quits in a month divided by total employment — over the last two decades.

The figure above illustrates a few things worth noting. One is that recessions really dampen quits. Three recessions have happened in the last two decades. The recession following 9/11, the Great Recession, and the Covid-19 Recession. During all three recessions, the quit rate dramatically dropped. Nothing makes a worker feel really attached to their job like the fear that there are no other jobs.

The second thing worth noting is that worker quits were lower in the last two decades than at the turn of the century. In the first few months of the 2000s (when this data first became available), the quit rate was about 2.6 percent. Until very recently, the quit rate never hit these heights again. The early 2000s came at the end of a long expansion. You know, when workers are likely to be feeling pretty chipper about their outside options. That optimism was obviously eroded by the recessions that followed.

The third thing worth noting is something that isn’t even on the figure. Even in the early 2000s, when quits appear high on this graph, they were actually low relative to the past. That’s because the U.S. labor market has gradually been becoming less dynamic. Given that quitting is the last bargaining chip that many workers have, this trend is troubling.

But, this trend would be more troubling if not for the last thing I notice about the graph. It’s that right now, workers are quitting at the highest rate in the last two decades. To me, this means that workers feel powerful for once. If workers continue to feel this power, I expect more and more employers will begin competing for hiring, potentially raising real wages in the process. For many workers, such a raise would be the first one in a long time.

Keeping the Power On

The current situation workers face is unique within the last two decades. Yet, it’s not very often that a global pandemic causes demand to be pent up, stimulated by federal policy, and then let loose in an instant. So, how do we maintain increased worker power going forward?

Policymakers have a few levers at their disposal. One is the federal minimum wage, which has been stagnant at 7.25 for a decade. Increasing the minimum wage doesn’t just help low-income workers. It also helps workers who earn above the minimum wage. After all, if they can leave their employer and the lowest wage they can possibly make isn’t that low, then they have more power.

Another lever is to end practices like non-compete agreements or anti-poaching agreements. In a limited number of circumstances, these tools may be important for employers. For example, when a worker could leave Google and take trade secrets to Yahoo. But, when Jimmy John’s is asking it’s workers to sign them, maybe we’ve gone to far. Ending these practices in all but the most necessary situations can give workers their bargaining power back.

A final lever is to lessen some of the restrictive licensing requirements that some occupations have surrounding them. It can be very difficult to enter certain labor markets, and this prevents movement from job-to-job. For example, getting licensed to be a cosmetologist can take several years. The point is to protect customers. But, it’s unclear how much this really “protects” anyone. After all, someone giving bad haircuts will quickly be called out on review web sites. Instead, these requirements likely just prevent people from moving from one field of work to another.

Luckily, it seems the Biden administration is setting its sights on both non-competes and occupational licensing. It’s a potential area of bipartisan agreement we should stand behind. After all, “I Quit” is often workers only way to exercise their power.

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